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Annex 16
TOOL FOR THE DEMONSTRATION AND ASSESSMENT OF ADDITIONALITY IN A/R CDM
PROJECT ACTIVITIES
1.
An afforestation or reforestation project activity under the CDM is additional if the actual net
greenhouse gas removals by sinks are increased above the sum of the changes in carbon stocks in the
carbon pools within the project boundary that would have occurred in the absence of the registered CDM
afforestation or reforestation project activity, in accordance with paragraphs 18–22 of Modalities and
procedures for afforestation and reforestation project activities under the clean development mechanism
in the first commitment period of the Kyoto Protocol (contained in the annex to Decision 19/CP.9).
2.
This document provides for a step-wise approach to demonstrate additionality in A/R CDM
projects. These steps include:
• Identification of alternatives to the A/R project activity (the possible baselines);
• Investment analysis to determine that the proposed project activity is not the most economically
or financially attractive; or
• Barriers analysis; and
• Impact of registration of the proposed afforestation or reforestation (A/R) project activity as an
A/R CDM project activity.
3.
The steps are summarized in the flowchart at the end of this document.
4.
The document provides a general framework for demonstrating additionality and is to be
applicable to a wide range of project types. Particular project types may require adjustments to this
framework.
5.
The use of this tool to assess and determine additionality does not replace the need for the
baseline methodology to provide for a stepwise approach justifying the selection and determination of the
most plausible baseline scenario alternatives. Project participants proposing new baseline methodologies
shall ensure consistency between the determination of additionality of a project activity and the
determination of a baseline scenario.
6.
Project participants proposing new baseline methodologies may incorporate this consolidated tool
in their proposal. Project participants may also propose other tools for the demonstration of additionality
to the Executive Board for its consideration.
7.
The use of this tool is not applicable for small- scale afforestation and reforestation project
activities.
Step 0. Preliminary screening based on the starting date of the A/R project activity
1.
Project participants shall:
•
•
Provide evidence that the starting date of the A/R CDM project activity was after 31 December
1999
Provide evidence that the incentive from the planned sale of GHG emission allowances was
seriously considered in the decision to proceed with the project activity. This evidence shall be
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based on (preferably official, legal and/or other corporate) documentation that was available to
third parties at, or prior to, the start of the project activity.
Step 0a. Preliminary screening based on the specific features of A/R activity
2.
Project participants shall provide evidence that the land within the planned project boundary is
eligible as the A/R CDM project activity.
• Land eligibility as non-forested lands needs to be proven applying the host country’s national
thresholds for forest definition under Decision 11/CP.7 as communicated by the respective DNA.
• The eligibility of land for A/R CDM project activity may be demonstrated verifiable information
relating to the situation before 1990 using (a) aerial photographs or satellite imagery
complemented by ground reference data; or (b) ground based surveys (land use permits, land use
plans or information from local registers such as cadastre, owners register, land use or land
management register); or (c) if options (a) and (b) are not available/applicable, project
participants shall submit a written testimony which was produced by following a participatory
rural appraisal methodology1.
• This evidence shall be supplemented by a survey of posterior land-use in cases where land cover
before 1990 alone is not sufficient to distinguish between forests and non-forests (e.g., bare lands
that may have been forests due to forest regeneration under way).
3.
Project participants shall provide evidence that the project activity is directly human-induced (e.g.
through planting, seeding and/or the human-induced promotion of natural seed sources or root stocks) and
not a mere continuation of the pre-project spontaneous processes.
• Evidence shall be based on a concrete attribution of the planned activities to the establishment of
a forest on non-forested lands that would otherwise not convert to forest.
• In case the activity consists in preventing disturbances (e.g. invasion, fire), continuity of the
disturbance risk during the project lifetime needs to be proven and monitored by the project
participants.
• Project participants further need to prove that the planned activity leads to the establishment of
forest under the host country’s national thresholds for forest definition under Decision 11/CP.7 as
communicated by the respective DNA.
1
Participatory rural appraisal (PRA) is an approach to the analysis of local problems and the formulation of
tentative solutions with local stakeholders. It makes use of a wide range of visualisation methods for group-based
analysis to deal with spatial and temporal aspects of social and environmental problems.
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Step 1. Identification of alternatives to the A/R project activity consistent with
the current laws and regulations
(Note: In accordance with guidance by the Executive Board, consistency is to be ensured between
“baseline scenario” and “baseline removals by sinks” 2. The use of this tool to assess and determine
additionality does not replace the need for the baseline methodology to provide for a stepwise approach
justifying the selection and determination of the most plausible baseline scenario alternatives. Project
participants proposing new baseline methodologies shall ensure consistency between the determination
of additionality of a project activity and the determination of a baseline scenario.)
1.
Define realistic and credible alternatives3 to the project activity(ies) that can be (part of) the
baseline scenario through the following sub-steps
Sub-step 1a. Define alternatives to the project activity:
2.
Identify realistic and credible land-use alternative(s) available to the project participants or
similar project developers4. These alternatives are to include:
•
•
•
The proposed project activity not undertaken as a A/R CDM project activity;
Other plausible and credible land-use alternatives to the project activity deemed appropriate with
respect to location, size, funds, expertise requirements, etc. This may include the alternatives that
represent an economically attractive course of action, taking into account barriers to investment
or the most likely land-use at the time the project starts, as well as common land-use practices
applied in the region where the proposed project is located.
If applicable, continuation of the current situation (no project activity or other alternatives
undertaken) or reverting to historical situation.
Sub-step 1b. Enforcement of applicable laws and regulations:
3.
The alternative(s) shall be in compliance with all applicable legal and regulatory requirements,
even if these laws and regulations have objectives other than land-use and related regulations, e.g.
conservation of biodiversity, soil and water resources protection / conservation, tax and investment
regulations, mitigation of air pollution.5 (This sub-step does not consider national and local policies that
have been implemented since the adoption of the modalities and procedures for the CDM6).
2
Please refer to the Glossary of A/R CDM terms contained in the “Guidelines for completing CDM-AR-PDD,
CDM-AR-NMB and CDM-AR-NMM” (http://cdm.unfccc.int/Reference/Documents).
3
Reference to “alternatives” throughout this document denotes “alternative scenarios”. Please follow guidance
offered by Decision 19/CP.9.
4
For example, continuation of the pre-project land-use or switch to land-use typical for region where the A/R CDM
project is planned to be located, establishing agricultural plantation, tourist resort, hunting area/farm, utilizing
regionally typical forms of funds investment or other economically attractive activities.
5
For example, an alternative consisting of intensive agriculture with extended use of herbicides and nutrients
would be non-complying in an area where this scenario would imply violations of e.g. water protection
regulations.
6
If the national and/or sectoral policies or regulations were implemented since the adoption by the COP of the
CDM M&P (decision 17/CP.7, 11 November 2001), then, these policies may not be taken into account in the
baseline determination based on Annex 3 to the report of the EB at its sixteenth meeting. See:
http://cdm.unfccc.int/EB/Meetings/016/eb16repan3.pdf
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4.
If an alternative does not comply with all applicable legislation and regulations, then show that,
based on an examination of current practice in the country or region in which the law or regulation
applies, those applicable legal or regulatory requirements are systematically not enforced. Specify
smallest administrative unit in the host country that encompasses the project area and check whether noncompliance with the legislation and regulation is widespread (prevalent on at least 50% of land covered
by the legislation and regulation). If this cannot be shown, eliminate the alternative from further
consideration.
5.
If the proposed project activity is the only alternative amongst the ones considered by the project
participants that is in compliance with all regulations with which there is general compliance, then the
proposed A/R CDM project activity is not additional.7
Sub-step 1c. Selection of the baseline scenario:
6.
The baseline methodology that would use this tool shall provide for a stepwise approach
justifying the selection and determination of the most plausible baseline scenario alternatives.
→ Proceed to Step 2 (Investment analysis) or Step 3 (Barrier analysis), as it is necessary to undertake
at least one of them.
Step 2. Investment analysis
1.
Determine whether the proposed project activity, without the revenue from the sale of temporary
CERs (tCERs) or long-term CERs (lCERs), is economically or financially less attractive than other
alternatives. Investment analysis may be performed as a stand-alone additionality analysis or in
connection to the Barrier analysis (Step 3). To conduct the investment analysis, use the following substeps:
Sub-step 2a. Determine appropriate analysis method
2.
Determine whether to apply simple cost analysis, investment comparison analysis or benchmark
analysis (sub-step 2b). If the A/R CDM project activity generates no financial or economic benefits other
than CDM related income, then apply the simple cost analysis (Option I). Otherwise, use the investment
comparison analysis (Option II) or the benchmark analysis (Option III)8.
Sub-step 2b. – Option I. Apply simple cost analysis
3.
Document the costs associated with the A/R CDM project activity and demonstrate that the
activity produces no financial benefits other than CDM related income.
→ If it is concluded that the proposed A/R CDM project activity produces no financial benefits other
than CDM related income then proceed to Step 4 (Impact of CDM Registration).
Sub-step 2b. – Option II. Apply investment comparison analysis
7
This provision may be further elaborated depending on deliberation from the Board regarding requirements for the
renewal of a crediting period.
8
Option I, Option II and Option III are mutually exclusive, i.e. only one can be applied by the project proponent.
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4.
Identify the financial indicator, such as IRR9, NPV, cost benefit ratio most suitable for the
project type and decision-making context.
Sub-step 2b – Option III. Apply benchmark analysis
5.
Identify the financial indicator, such as IRR10, NPV, cost benefit ratio, or other (e.g. required rate
of return (RRR) related to investments in agriculture or forestry, bank deposit interest rate corrected for
risk inherent to the project or the opportunity costs of land, such as any expected income from land
speculation) most suitable for the project type and decision context. Identify the relevant benchmark
value, such as the required rate of return (RRR) on equity. The benchmark is to represent standard
returns in the market, considering the specific risk of the project type, but not linked to the subjective
profitability expectation or risk profile of a particular project developer. Benchmarks can be derived
from:
• Government bond rates, increased by a suitable risk premium to reflect private investment and/or
the project type, as substantiated by an independent (financial) expert;
• Estimates of the cost of financing and required return on capital (e.g. commercial lending rates
and guarantees required for the country and the type of project activity concerned), based on
bankers views and private equity investors/funds’ required return on comparable projects;
• A company internal benchmark (weighted average capital cost of the company) if there is only
one potential project developer (e.g. when the project activity upgrades an existing activity). The
project developers shall demonstrate that this benchmark has been consistently used in the past,
i.e. that project activities under similar conditions developed by the same company used the same
benchmark.
Sub-step 2c. Calculation and comparison of financial indicators (only applicable to options II and
III):
6.
Calculate the suitable financial indicator for the proposed A/R CDM project activity without the
financial benefits from the CDM and, in the case of Option II above, for the other alternatives. Include all
relevant costs (including, for example, the investment cost, the operations and maintenance costs), and
revenues (excluding tCER or lCERs revenues, but including subsidies/fiscal incentives11 where
applicable), and, as appropriate, non-market cost and benefits in the case of public investors.
7.
Present the investment analysis in a transparent manner and provide all the relevant assumptions
in the CDM-AR-PDD, so that a reader can reproduce the analysis and obtain the same results. Clearly
present critical economic parameters and assumptions (such as capital costs, lifetimes, and discount rate
or cost of capital). Justify and/or cite assumptions in a manner that can be validated by the DOE. In
calculating the financial indicator, the project’s risks can be included through the cash flow pattern,
9
For the investment comparison analysis, IRRs can be calculated either as project IRRs or as equity IRRs. Project
IRRs calculate a return based on project cash outflows and cash inflows only, irrespective the source of financing.
Equity IRRs calculate a return to equity investors and therefore also consider amount and costs of available debt
financing. The decision to proceed with an investment is based on returns to the investors, so equity IRR will be
more appropriate in many cases. However, there will also be cases where a project IRR may be appropriate.
10
For the benchmark analysis, the IRR shall be calculated as project IRR. If there is only one potential project
developer (e.g. when the project activity upgrades an existing process), the IRR shall be calculated as equity IRR.
11
This provision may be further elaborated depending on deliberations by the Board on national and sectoral
policies.
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subject to project-specific expectations and assumptions (e.g. insurance premiums can be used in the
calculation to reflect specific risk equivalents).
8.
Assumptions and input data for the investment analysis shall not differ across the project activity
and its alternatives, unless differences can be well substantiated.
9.
Present in the AR-CDM-PDD submitted for validation a clear comparison of the financial
indicator for the proposed A/R CDM project activity without the financial benefits from the CDM and:
Option II (investment comparison analysis): If one of the other alternatives has the better
indicator (e.g. higher IRR), then the A/R CDM project activity can not be considered as the
financially attractive; or
Option III (benchmark analysis): If the A/R CDM project activity has a less favourable indicator
(e.g. lower IRR) than the benchmark, then the A/R CDM project activity cannot be considered as
financially attractive.
→ If it is concluded that the proposed A/R CDM project activity without the financial benefits from
the CDM is not financially attractive then proceed to Step 2d (Sensitivity Analysis).
Sub-step 2d. Sensitivity analysis
10.
Include a sensitivity analysis that shows whether the conclusion regarding the financial
attractiveness is robust to reasonable variations in the critical assumptions. The investment analysis
provides a valid argument in favour of additionality only if it consistently supports (for a realistic range of
assumptions) the conclusion that the proposed A/R CDM project activity without the financial benefits
from the CDM is unlikely to be financially attractive.
•
If after the sensitivity analysis it is concluded that the proposed A/R CDM project activity
without the financial benefits from the CDM is unlikely to produce an economic benefit
(Option I) or to be financially attractive (Option II and Option III), then proceed directly to
Step 4 (Impact of CDM registration).
•
If after the sensitivity analysis it is concluded that the proposed A/R CDM project activity
without the financial benefits from the CDM is likely to produce economic benefit (Option I) or
to be financially attractive (Option II and Option III), then the project activity cannot be
considered additional by means of Financial analysis. Optionally proceed to Step 3 (Barrier
analysis) to prove that the proposed project activity faces barriers that do not prevent the
baseline scenario(s) from occurring.
Step 3. Barrier analysis
Barrier analysis may be performed as a stand-alone additionality analysis or as an extension of
investment analysis.
1.
If this step is used, determine whether the proposed project activity faces barriers that:
•
Prevent the implementation of this type of proposed project activity; and
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•
2.
Do not prevent the implementation of at least one of the alternatives.
Use the following sub-steps:
Sub-step 3a. Identify barriers that would prevent the implementation of type of the proposed project
activity:
3.
Establish that there are barriers that would prevent the implementation of the type of proposed
project activity from being carried out if the project activity was not registered as an A/R CDM activity.
Barriers that impede a project activity should not be analyzed in relation to the project participants, but
solely in relation to the proposed project activity. Such barriers may include, among others:
•
•
•
•
•
•
•
•
Investment barriers, other than the economic/financial barriers in Step 2 above, inter alia:
- Debt funding is not available for this type of project activity;
- No access to international capital markets due to real or perceived risks associated with
domestic or foreign direct investment in the country where the project activity is to be
implemented;
- Lack of access to credit;
Institutional barriers, inter alia:
- Risk related to changes in government policies or laws;
- Lack of enforcement of forest or land-use-related legislation.
Technological barriers, inter alia:
- Lack of access to planting materials
- Lack of infrastructure for implementation of the technology.
Barriers related to local tradition, inter alia:
- Traditional knowledge or lack thereof, laws and customs, market conditions, practices;
- Traditional equipment and technology;
Barriers due to prevailing practice, inter alia:
- The project activity is the “first of its kind”: No project activity of this type is currently
operational in the host country or region.
Barriers due to local ecological conditions, inter alia:
- Degraded soil (e.g. water/wind erosion, salination, etc.);
- Catastrophic natural and / or human-induced events (e.g. land slides, fire, etc);
- Unfavourable meteorological conditions (e.g. early/late frost, drought);
- Pervasive opportunistic species preventing regeneration of trees (e.g. grasses, weeds);
- Unfavourable course of ecological succession;
- Biotic pressure in terms of grazing, fodder collection, etc.
Barriers due to social conditions, inter alia:
- Demographic pressure on the land (e.g. increased demand on land due to population
growth);
- Social conflict among interest groups in the region where the project takes place;
- Widespread illegal practices (e.g. illegal grazing, non-timber product extraction and tree
felling);
- Lack of skilled and/or properly trained labour force;
- Lack of organisation of local communities.
Barriers relating to land tenure, ownership, inheritance, and property rights, inter alia:
- Communal land ownership with a hierarchy of rights for different stakeholders limits the
incentives to undertake A/R activity.
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-
Lack of suitable land tenure legislation and regulation to support the security of tenure.
Absence of clearly defined and regulated property rights in relation to natural resource
products and services.
Formal and informal tenure systems that increase the risks of fragmentation of land
holdings
Barriers relating to markets, transport and storage
Unregulated and informal markets for timber, non-timber products and services prevent
the transmission of effective information to project participants.
Remoteness of A/R activities and undeveloped road and infrastructure incur large
transportation expenditures, thus eroding the competitiveness and profitability of timber
and non-timber products from the CDM activity.
Possibilities of large price risk due to the fluctuations in the prices of timber and nontimber products over the project period in the absence of efficient markets and insurance
mechanisms.
Absence of facilities to convert, store and add value to production from CDM activities
limits the possibilities to capture rents from the land use under A/R CDM project
activity.”
4.
The identified barriers are only sufficient grounds for demonstration of additionality if they
would prevent potential project proponents from carrying out the proposed project activity if it was not
expected to be registered as an A/R CDM project activity.
5.
Provide transparent and documented evidence, and offer conservative interpretations of this
documented evidence, as to how it demonstrates the existence and significance of the identified barriers.
Anecdotal evidence can be included, but alone is not sufficient proof of barriers. The type of evidence to
be provided may include:
• Relevant legislation, regulatory information or environmental/natural resource management
norms, acts or rules;
• Relevant (sectoral) studies or surveys (e.g. market surveys, technology studies, etc) undertaken
by universities, research institutions, associations, companies, bilateral/multilateral institutions,
etc;
• Relevant statistical data from national or international statistics;
• Documentation of relevant market data (e.g. market prices, tariffs, rules);
• Written documentation from the company or institution developing or implementing the A/R
CDM project activity or the A/R CDM project developer, such as minutes from Board meetings,
correspondence, feasibility studies, financial or budgetary information, etc;
• Documents prepared by the project developer, contractors or project partners in the context of the
proposed project activity or similar previous project implementations;
• Written documentation of independent expert judgements from agriculture, forestry and other
land-use related Government / Non-Government bodies or individual experts, educational
institutions (e.g. universities, technical schools, training centres), professional associations and
others.
Sub-step 3 b. Show that the identified barriers would not prevent the implementation of at least one of
the alternatives (except the proposed project activity):
6.
If the identified barriers also affect other alternatives, explain how they are affected less strongly
than they affect the proposed A/R CDM project activity. In other words, explain how the identified
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barriers are not preventing the implementation of at least one of the alternatives. Any alternative that
would be prevented by the barriers identified in Sub-step 3a is not a viable alternative, and shall be
eliminated from consideration. At least one viable alternative shall be identified.
•
If both Sub-steps 3a – 3b are satisfied, proceed to Step 4 (Impact of CDM registration)
•
If one of the Sub-steps 3a – 3b is not satisfied then the project activity cannot be considered
additional by means of barrier analysis. Optionally proceed to Step 2 (Investment analysis) to
prove that the proposed A/R CDM project activity without the financial benefits from the CDM
is unlikely to produce economic benefit (Option I) or to be financially attractive (Option II and
Option III).
Step 4. Impact of CDM registration
1.
Explain how the approval and registration of the project activity as a A/R CDM project activity,
and the attendant benefits and incentives derived from this registration, will alleviate the economic and
financial hurdles (Step 2) or other identified barriers (Step 3) and thus enable the project activity to be
undertaken. The benefits and incentives can be of various types, such as:
•
•
•
•
•
Net anthropogenic greenhouse gas removals by sinks;
The financial benefit of the revenue obtained by selling tCERs or lCERs, including certainty and
pre-defined timing of its reception;
Attracting new players who are not exposed to the same barriers, or can accept a lower IRR (for
instance because they have access to cheaper capital);
Attracting new players who bring the capacity to implement a new technology/practice, and
Reducing inflation /exchange rate risk affecting expected revenues and attractiveness for
investors.
→ If Step 4 is satisfied, the proposed A/R CDM project activity is not the baseline scenario and, hence,
it is additional.
→ If Step 4 is not satisfied, the proposed A/R CDM project activity is not additional.
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Flowchart: Additionality scheme